The Italian put his side ahead in the first half and scored again after the break following the dismissal of United defender Johnny Evans early in the second half.
Sergio AgÃ¼ero then inflicted further misery on Sir Alex Fergusonâ€™s side before a late wonder goal from Darren Fletcher offered United supporters some consolation.
Substitute Edin Dzeko then scored two quick-fire goals either side of David Silva’s strike to hand City a resounding victory at Old Trafford.
United had started brightly and controlled the opening exchanges as Ashley Young terrorised Cityâ€™s defence.
The England winger drew three fouls in quick succession from Micah Richards and James Milner – but the home side failed to test Joe Hart from the resulting set-pieces.
Young, who looked Unitedâ€™s most dangerous player, had the first sighting of goal as he latched onto a loose ball and released a powerful shot – but Englandâ€™s No1 saved comfortably.
The first 15 minutes were dominated by United but Silva did offer some brief respite for the City defenders when his meandering run drove him into the opposition area, winning a corner.
Roberto Manciniâ€™s men were beginning to find a foothold in the game and their opening goal arrived after 21 minutes, when Silva sprinted down the left wing and cut-back to Balotelli on the edge of the area.
The striker was given time to set his body, helped by Evanâ€™s unfortunate slip, and slotted a sublime strike past David de Gea into the bottom right corner.
United did briefly recover from the shock of Balotelliâ€™s opener.
Anderson and Wayne Rooney tried to test Hart but their shots both veered wide, while Evans, six yards out, miskicked an attempted effort, much to the anguish of an increasingly frustrated Ferguson.
Evans’s afternoon was to get substantially worse minutes after half-time.
The centre-half, asked to deputise for the injured Nemanja VidiÄ‡ ahead of Phil Jones, was caught out by a deft incisive pass from Silva – and the Northern Ireland international dragged down Balotelli, leaving referee Mark Clattenburg with no choice but to issue a straight red.
City sensed their opportunity to make a real statement in their pursuit of the Premier League title and they took advantage of the extra space to lethal effect.
Silva and Milner combined on the edge of Unitedâ€™s area before the England international delivered a perfect cross to Balotelli, who tapped the ball into an empty net with half an hour remaining.
AgÃ¼ero then put the tie beyond any doubt when another slick passing move found its way to Richards, who delivered a low cross for the Argentine forward to push under De Gea.
With Old Traffford emptying rapidly, Fletcher offered United supporters some brief hope of an unlikely comeback. The midfielder played a one-two with substitute Javier HernÃ¡ndez and fired a curling effort past Hart.
Mancini, with a wealth of talent at his disposal on the bench, brought on Dzeko and Samir Nasri. And the Bosnian managed to add a fourth as the match edged into stoppage time when he bundled home from a corner.
There was still time for the visitors to heap further misery on their derby rivals, and when City broke with a man advantage, Silva tucked the ball through De Geaâ€™s legs.
Moments later, Cityâ€™s Spanish midfielder showed exemplary control and vision to release Dzeko, who bagged his second of the afternoon when he fired past De Gea to complete the rout and push the league leaders five points clear at the top of the table.
Manchester United: David De Gea, Chris Smalling, Rio Ferdinand, Jonny Evans, Patrice Evra, Ashley Young, Nani (Javier HernÃ¡ndez, 66), Darren Fletcher, Anderson (Phil Jones, 66), Wayne Rooney, Danny Welbeck.
Manchester City: Joe Hart, GaÃ«l Clichy, Joleon Lescott, Micah Richards, Vincent Kompany, Yaya TourÃ©, David Silva, James Milner (Aleksandar Kolarov, 89), Gareth Barry, Mario Balotelli (Edin Dzeko, 70), Sergio AgÃ¼ero (Samir Nasri, 76).
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